The online shopping revolution

The practice of buying and selling services online has become familiar to everyone with access to the internet. 

But e-commerce is now invading the retail space at a pace that will have far-reaching consequences for business, consumers and investors.

Retail e-commerce sales worldwide are set to grow by more than 23% this year to $2.29tr – four times the pace of traditional sales – and account for one-tenth of the combined total for the first time, according to digital market research company eMarketer. 

By 2021 they will amount to $4.479tr, or 16%, of the total. 

Unsurprisingly, China is the world’s largest e-commerce market with nearly half of total estimated sales, which account for just over a fifth in the country itself. 

It has a significant lead over the other big national players – the US, UK and Japan.

South Africa has lagged the global trend but is starting to catch up. 

A survey released by PayPal and Ipsos earlier this year showed that local online spending amounted to R37.1bn last year and will climb to R53bn next year. 

The research indicated that 58% of South African adults who use the internet shopped online in 2016, with more than 40% stating that they had bought their products outside of the country. 

Over half of those shoppers said they would increase their online spending in the coming year.

A number of factors are supporting the trend, including the greater variety of products offered, the evolution of shopping apps, and the profile and behaviour of shoppers themselves. 

The popularity of mobile phones is key – eMarketer’s data shows that mobile shopping will account for more than 70% of e-commerce this year in China and India, and one-third of the total in Germany, the UK and US. 

Apart from convenience, online shopping is often cheaper, as overheads for online retailers are lower – although specials and discounts are often still better in traditional stores.

South African retailers are scrambling to jump on the bandwagon. According to Tammy Binedell-Barber, marketing head for online price-comparison service PriceCheck, there are now at least 600 to 700 well-known traditional retailers with online stores. 

She believes that if one includes companies exclusively selling online, there should be at least double that. The number of listed retailers using PriceCheck’s online marketplace has grown to more than 500 from 200 two years ago.

The question is, how should investors respond to this disruption of the retail sector? Despite the e-commerce market’s rapid growth and revenue increases of up to 40% for some players, many online retailers did not perform well on stock markets last year, and analysts are warning that caution is warranted, particularly if you’re looking for short-term gains. 

Few of the dominant giants, like Amazon, are cheaply priced. 

But there are rising stars. Online retail has become one of the UK’s most successful sectors; the share price of online fashion retailer Boohoo, for instance, rocketed by 265% in 2016. 

Backed by its 16- to 24-year-old fans and the promotion of its products on Instagram, the company nearly doubled its pre-tax profit to £31m pounds in the year to the end of February.

There’s plenty of evidence that online retail is a sector to keep an eye on, globally. Private e-commerce companies raised over $46.7bn across 3 880 deals between 2012 and 2016, tech market intelligence platform CB Insights points out. 

Although there were three consecutive quarters of sharp declines in 2016, there was a “hot streak” of deals growth in the first half of this year. 

Japan’s SoftBank, the world’s largest technology investment firm, recently invested $2.5bn into India’s most valuable start-up, Flipkart – taking its investments in that country so far to $6bn. 

The company, which is listed on the Tokyo Stock Exchange, has a $100bn tech fund and has been an enthusiastic supporter of e-commerce in developing markets.

Investing in businesses like SoftBank – which make the choices – is a good strategy, says Adrian Saville, founder and chief executive of Cannon Asset Managers. 

Saville also sees value in Taiwan Semiconductor, the world’s largest dedicated independent semi-conductor foundry, and Intel, an American global technology company supplying the processors found in most personal computers.

But many companies are not priced for their long-term potential, as the shift to e-commerce is such a long and gradual process, says Dan Brocklebank, director of Allan Gray’s offshore partner Orbis. 

He identifies an opportunity in MercadoLibre, the e-commerce giant of Latin America – a region shunned by many global investors at present because of sluggish economic growth and currency volatility.

Investors should also be aware of the disruptive consequences of e-commerce on other sectors, particularly real estate. In the US, there have been numerous store closures and layoffs that have reduced rental costs for retail premises. 

But by the same token, rentals for warehouses used by online retailers have increased.

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 21 September edition of finweek. Buy and download the magazine here

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